China’s market meltdown: how should corporate treasurers respond to a falling yuan?

by Natasha Lala, OANDA Solutions for Business

With China’s economy and currency in troubled times, Natasha Lala of OANDA Solutions for Business explains how corporate treasurers exposed to the yuan can best manage their business through the market turmoil.

A volatile cocktail of shock government devaluations, unpredictable equity markets and sinking commodity prices, has significantly hit the value of the Chinese yuan, leaving many investors with a major headache. It appears that efforts to bring stability to the currency, such as the Chinese Government relinquishing some of its control over the yuan to the markets, has done little to change things – despite the IMF designating the yuan as an elite global currency, alongside the dollar, sterling and the euro.

The fear is that the weaker yuan could lead other nations to devalue – potentially triggering a global currency war. Already this month, we have seen Japan devalue its yen in the hope of boosting consumer spending. Therefore, if the yuan continues to fall further in the coming months, then other currencies are likely to fall too. All in all, it’s not looking good for investors exposed to China.

But investors aren’t the only ones worried, corporate treasurers exposed to China have equal cause for concern – as tasks including getting accurate prices and hedging foreign exchange (FX) exposures must seem like quite a tall order. In light of this, how exactly should these corporate treasurers go about dealing with the current market volatility?

Before finding an answer, it’s worth exploring the type of businesses in question and what goods they buy and sell from China. For example, sluggish industrial growth is continuing to hurt companies that export brent crude oil, copper, aluminium, platinum and Iron ore, all of which have sunk like stone. However, on the flip side, international retailers may be seeing some growth spurts as Chinese consumption increases thanks to the weak yuan. Regardless of the type of corporate and the situation they may find themselves in, everyone has to consider whether they have sufficient data and tools in place to properly monitor their risk.

The first step for these firms is to ensure that they have automated data feeds for FX rates so they have the most accurate prices. It is also crucial that treasurers get a broad range of prices, especially for those dealing with a single bank to get pricing information. When a major market like China is in a period of high volatility, a treasurer needs to see more than one source to get the best price in line with market consensus. But in order to get this accurate rate, a treasurer really needs a broader view of what is going on. This involves analysing different currency pairs, including USD/CNY and GBP/CNY, and any event that that could affect their value – like an unexpected decision by the US Fed moving to negative interest rates.

However, even with more pricing options and automation, treasurers may still be uncertain about their approach to hedging in this volatile environment. If this is the case, they might wish to consider performing a stress test that analyses how their hedging strategies have performed during previous periods of prolonged market volatility. That may not cover one completely, but it can help to instil some confidence in the model and highlight where the gaps are.

Today it’s all about China, but this could just be the beginning of things to come. From oil prices, to geopolitical turmoil and unanticipated devaluations, a host of external developments will continue to influence how currencies move. For corporate treasury teams looking to manage the next wave of market volatility, the situation in China is a timely reminder of the need to reassess their approach to hedging as well as the importance of accessing a wider pool of prices to make more informed decisions.